Pause in the Bond Boom

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Considering the economy's weakness, many experts argue that fears of crowding out in the market are also overblown. Reason: as companies increase their long-term borrowings, they are paring their short-term debt even more, thus easing their overall demand for credit.

What happens to bonds in 1983 will depend crucially on the Federal Reserve. Having stressed repeatedly since 1979 that it was determined to prevent the money supply from expanding out of control, the Fed since midsummer has allowed money to grow at an annual rate that is now approaching 17%, just about three times the bank's own officially announced 1982 target growth rate. Though the Fed has sought to play down the significance of the overshoot, investors are concerned that the growth will eventually prove inflationary, provoking the Fed to tighten up, sending interest rates soaring.

On the other hand, many experts believe that such fears are premature. Says Michael Evans, chief economist of McMahan, Brafman, Morgan and Co., a New York securities firm: "With the economy so weak, I think the Fed is just plain too scared to do anything except keep pushing out money for the foreseeable future. We've seen 15% money growth in the last quarter with no recovery in sight, so they'll probably keep pushing. To put it bluntly, the Fed will continue to buy up the Government's debt."

Ultimately, of course, too much money can wind up being as damaging to an economy as too little. While the Fed walks the razor's edge between economic collapse and runaway inflation, it badly needs the support of both the Congress and the Administration to curb spending, chop the deficit and prevent the nation's current economic troubles, and the bond market's jitters, from turning into something far worse. —By Christopher Byron. Reported by David Beckwith/Washington and Frederick Ungeheuer/New York